U.S. dollar hits four-week low as risk appetite returns

NEW YORK (Reuters) - The dollar slid to a new four-week low on Tuesday, as the U.S.-Mexico trade deal aimed at overhauling the North American Free Trade Agreement prompted investors to unwind more of their safe-haven bets on the greenback, boosting appetite for higher-risk assets.

A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

The U.S. currency has fallen for three consecutive weeks, and is down nearly 2 percent.

By afternoon trading, however, the greenback had retraced its losses, with the dollar index .DXY down just 0.1 percent on the day at 94.717.

The United States and Mexico agreed on Monday to overhaul NAFTA, putting pressure on Canada to agree to new terms on auto trade and dispute settlement rules to remain part of the three-country pact.

Against the Canadian dollar, the greenback fell 0.2 percent to C$1.2930 CAD=. The U.S. dollar recovered ground against the yen, trading up 0.1 percent at 111.23 yen JPY=.

“Admittedly, signs that the U.S. administration is willing to negotiate and accept a compromise on trade will presumably be welcomed in China and Europe,” said Oliver Jones, market economist, at Capital Economics in London.

But he added that there are reasons to be cautious about the trade deal, noting that the new agreement is still “more protectionist than the NAFTA status quo.”

The greenback also pared losses after the U.S. consumer confidence index came in higher than expected.

The dollar had also been stung by comments from Federal Reserve Chairman Jerome Powell at the Jackson Hole, Wyoming conference this past week that seemed to suggest a slower pace of U.S. interest rate increases.

He said the Fed will continue to raise interest rates, but noted that the U.S. central bank sees no clear sign of inflation accelerating above 2 percent.

“Jay Powell is sounding like a dove, and I believe it is self-preservation,” said John Taylor, president and co-founder of research firm Taylor Global Vision in New York. “There are one or two hikes ahead: we bet it is one in December giving an open track over the election.”

U.S. President Donald Trump in an interview with Reuters last week said he was “not thrilled” with the Fed under Powell - his own appointee - for raising interest rates.

Further adding to overall risk appetite was news that China’s central bank allowed its currency to strengthen against the dollar via its daily fixings.